When you take a loan against a Fixed Deposit (FD), the bank uses your deposit as collateral and offers funds at a relatively lower interest rate than most unsecured loans. The way interest is calculated depends on whether the facility is structured as a term loan or an overdraft against the FD. Understanding these two options can help you choose the most suitable borrowing method based on your financial needs and repayment capacity.
In a loan against FD structured as a term loan, the bank disburses a lump sum amount directly into your account. Interest is charged on the entire loan amount from the date of disbursement, regardless of how much of the money you actually use. The interest rate generally remains fixed throughout the tenure and is usually a few percentage points higher than the FD interest rate. Repayment is made through Equated Monthly Instalments (EMIs) or according to the agreed repayment schedule.
Alternatively, banks may offer an overdraft (OD) facility against your FD. Under this arrangement, the bank sanctions a credit limit, typically ranging from 80% to 90% of the FD value. You can withdraw funds whenever required, up to the approved limit. The key advantage of this facility is that interest is charged only on the amount utilised and only for the number of days it remains outstanding. For example, if you withdraw a portion of the available limit and repay it quickly, you pay interest only for that period and amount. The interest rate is generally linked to the FD rate, with a small premium of around 1% to 2%.
An overdraft against FD also offers greater repayment flexibility. There are usually no fixed EMIs, and you can deposit or withdraw funds multiple times within the sanctioned limit. However, the outstanding amount must be cleared before the FD matures. This flexibility makes the OD facility a preferred option for managing short-term or fluctuating cash flow requirements.
